Create a Variable Compensation Plan

Guide the design and administration of variable compensation programs with a comprehensive variable compensation plan.

Your Challenge

  • Organizations need to avoid unaffordable outlays in turbulent times, yet incentivize behaviors that lead to increased profitability. Striking the right balance between cost control and ongoing competitiveness is difficult.
  • There are so many variables that affect the suitability of variable compensation plans that it’s difficult to know what effect each should have on plan selection and design.
  • Without a variable compensation policy to steer their decisions, organizational leaders often make unguided compensation decisions which can lead to real or perceived inequity. This can lead to a variety of negative outcomes, including lower productivity due to disengagement and even costly lawsuits.

Our Advice

Critical Insight

  • Business strategy, business lifecycle, culture, industry, workforce composition and demographics, laws and regulations, organizational suitability, and employee segment suitability should all be taken into consideration when selecting and designing plans.
  • Having payout floors and ceilings is acceptable, as long as 95% of performance outcomes fall within the normal range; otherwise, they can act as strong incentives for employees to act in ways that strip business value (i.e. “gaming”).
  • Budgets/targets should never be linked to compensation and/or non-monetary rewards (e.g. promotions, public accolades) because it creates a strong incentive for employees to set artificially low targets (i.e. “sandbagging”) and/or lie about their actions or performance. Either way, corporate value is eroded.
  • All payout designs (linear, stepped, and curvilinear) are appropriate for all employee segments under different circumstances, with the notable exception of executives. Executives should always be on a linear payout scheme because the incentive for gaming is high on stepped and curvilinear plans.

Impact and Result

  • Develop a clearly-articulated variable compensation plan that accurately reflects the organization’s true approach to compensation decision-making and practice.


  • McLean & Company conducted an extensive HR benchmarking survey, which captured responses on candidate sourcing strategies and trends from over 500 HR and IT professionals, between June 2011 and present day.
  • McLean & Company conducted a variable compensation planning survey that captured responses on current practices and trends from approximately 42 HR and IT professionals in October 2012.
  • McLean & Company conducted four interviews with thought leaders and HR practitioners between October and November 2012.

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Get to Action

  1. Engage in variable compensation planning

    Establish variable compensation rules to attract and retain employees and control costs.

Guided Implementation Icon Talk to an Analyst

Our analyst calls are focused on helping our members use the research we produce, and our experts will guide you to successful project completion.

  • Book an Analyst Call on this topic. You can start as early as tomorrow morning. Our analysts will explain the process in your first call.
  • Get advice from a subject matter expert. Each call will focus on explaining the material and helping you to plan your project, interpret and analyze the results of each project step, and setting the direction for your next project step.

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Search Code: 56816
Published: November 22, 2012
Last Revised: November 22, 2012

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VL Methodology